Real Estate Objections are the obstacles of real estate value. Every investor and most homeowners are interested in the value of their property and specifically, how to increase or maximize it. Obviously, appreciation and depreciation will affect the value of a property, but these factors change value over an extended period and are beyond the control of the owner. To increase property value over a short period of time deliberately, an owner must remove objections.
Real estate objections fall into two main categories: "Physical" and "Administrative"
Physical Objections are simply, deficiencies of a property which result from deferred maintenance, poor design, and external influences (such as a busy street) which have a negative impact on value. Physical objections can be broken into two categories: "Curable and Incurable."
Curable Objections are those which can be conquered and removed from the property. An example of a curable objection would be a property's lack of a garage in a neighborhood where a garage is an expectation. Assuming that driveway access exists and that governing authorities will allow, the construction of a conforming garage would effectively remove this objection.
Incurable Objections are those which cannot be removed by reasonable means. An example of an incurable objection would be a home's contiguous property line with a nuclear power plant- yes, the power plant could be removed, but no....it's not going to happen.
My Rule of Thumb: Never purchase a home with more than one incurable objection. A single incurable objection can be easily accounted for by calculating the effect of that objection on comparable properties. In the example of a busy street, the possible downward effect on value can be observed in the sales prices of comparable properties from the same or similarly busy street as compared to those which are located a block or two into a quieter neighborhood.
When two or more incurable objections exist, it is very difficult to calculate the cumulative effect of the objections. Example: A home lacks a garage in a neighborhood where a garage is an expected amenity. Due to limited yard size or access, there is no ability to add a garage. This home also offers two exceptionally small bedrooms with no ability to expand without further compromising the layout. It is quite possible that a potential buyer may be willing to overlook either or both objections, however, calculating the value of the property becomes guesswork. Should the value of each objection be calculated separately and then the sum removed from the comparable properties? Or should the cumulative sum of the negative adjustments be greater than the sum of its parts? I would opt for the later, but really...who knows? And actually, who cares? The point is that the buyer's lack of confidence in understanding or calculating value will keep that buyer from writing an offer. In most cases, that buyer will likely hesitate long enough to find and purchase another property which poses fewer unanswerable questions. To sum up this point: Stacking Incurable Objections = BAD IDEA
Administrative Objections in real estate are invisible defects such as title issues, foreclosure, short sale, mechanic's liens, probate delays, or tax liens. These issues can often have a significantly negative effect on value as they can postpone or prevent a sale. Buyers who choose to pursue properties which have administrative objections should expect to be compensated (via lowered purchase price) for the headache they may likely endure. For example, why would a buyer be willing to wait 3-4 months for "short sale approval" if not for the fact that the subject property was priced below traditional, or even foreclosure pricing?
The beauty of administrative objections is that they are typically removed by the sole act of purchasing the property. A "foreclosure" property is no longer a foreclosure once purchased. A "short sale" property is no longer a short sale once purchased. In essence, the dark mark is removed and thus the value is increased by simply purchasing and closing on the property.
Stacking Objections for Maximum Return
Again, please remember that you shouldn’t stack “incurable” objections. Stacking “curable” objections, however, can prove to be most fruitful for the patient and savvy buyer. For example: Take the “granny house” (for lack of a better term.) This otherwise mechanically solid home may have outdated cosmetics such as an old kitchen, old carpeting and wallpaper. Let’s also assume that this home is an estate and is being sold in a cluttered and dirty condition. As the children no longer live nearby, they don’t want to be burdened with the hassle of clearing out the personal property. Furthermore, the seller was a smoker for 50 years and the home now has an overpowering smoke smell. The seller’s children are motivated to sell the property quickly and settle the estate, however, the probate process has just begun and won’t be settled for another 60 days. A buyer who is willing to wait for the probate to be settled in order to close on the property, and who has the vision to take on the cosmetic issues and the cleanup process should be able to purchase the property at a considerable discount from traditional market value. This is actually one of the most common and successful purchase-and-renovate investment property scenarios.
The above example demonstrates how a buyer can combine curable objections and administrative objections for maximum return on investment. Whether a buyer is interested in ultimately selling or renting the investment property, the same principles apply.
Adam Duckwall - Edina Realty 651-353-4650, adam@adamduckwall.com
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